India's mutual fund industry may experience a moderate reduction in profitability if the Securities and Exchange Board of India (SEBI) proceeds with its proposed reforms aimed at lowering investor costs, according to Nomura's recent analysis. The consultation paper released by SEBI outlines key changes, including the elimination of the 5-basis-point levy on schemes with exit loads, a 15-bps reduction in total expense ratio (TER) caps, and a significant cut in the brokerage-fee ceiling. These reforms are intended to enhance investor returns but could significantly impact asset managers' earnings, particularly in the equity sector.

Nomura highlights that the withdrawal of the 5bps levy would have a profound effect on larger asset managers. For instance, HDFC AMC, the largest equity manager in India, could see a loss of approximately Rs 334 crore in annual revenue, translating to a 7.3% reduction in forecast profit before tax (PBT) for FY27. Similarly, Nippon India Mutual Fund (NAM) is projected to face a 7.9% decline in FY27 PBT, equating to a revenue drop of Rs 186 crore. Both firms are expected to mitigate these losses through strategic adjustments in distributor payouts, although NAM's exposure to smaller and mid-cap schemes may make it particularly vulnerable to market fluctuations.

While SEBI's proposal to reduce TER caps may initially appear detrimental, Nomura anticipates that the overall impact on asset management company (AMC) earnings will be negligible. This is due to the exclusion of statutory levies like GST, which many funds already incur and which offset the proposed cuts. Additionally, the report suggests that a reduction in brokerage charges will not significantly affect AMC profitability, as these costs are typically passed on to investors. While these changes might intensify operational pressures on active managers and push the industry toward passive strategies, Nomura remains optimistic about the growth prospects for both HDFC AMC and NAM, emphasizing their strong market positions and ability to adapt to regulatory changes. Public feedback on the consultation is open until November 17.